Don’t Count on U.S.-China Trade Relations Warming Up Anytime Soon

(Bloomberg Businessweek) -- President Trump, who made taking on China’s unfair trade practices one of his top priorities after coming into office in 2017, has shown that he’s willing to use unconventional tools to get Beijing to the table. But even if negotiators from his administration get China to commit to their demands—including protecting U.S. intellectual property and buying massive amounts of U.S. goods and services to narrow the trade deficit—that doesn’t mean America will go back to business as usual with Beijing.

This isn’t solely a function of the administration’s brinkmanship, which has led both countries to the point of imposing new duties of roughly $360 billion over the past nine months. Shortly after U.S. Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer visited China for a round of negotiations in late March, China’s vice premier, Liu He, returned to Washington for what may be the final push for the two countries to reach a deal. After meeting with Liu on April 4, Trump said that they were “rounding the turn,” while Liu said that a “new consensus” had emerged, according to Xinhua News Agency. But business leaders, both parties in Congress, and U.S. allies are also running out of patience with China’s trade practices, leaving Beijing with few allies in Washington to help defuse an economic standoff.

In the past two years, the Trump administration has imposed tariffs on roughly $250 billion in Chinese imports. It’s also vowed to limit market access for Chinese telecommunications companies and to scrutinize Chinese investment in critical U.S. sectors. Embarking on an international campaign, the administration is pushing allies to bar China’s Huawei Technologies Co. from providing the infrastructure for 5G networks. Many Chinese officials find it hard to grasp that the rules of engagement are no longer the same, says Tim Stratford, chairman of the American Chamber of Commerce in Beijing. “Many in China see so many things in the U.S.-China relationship change at the same time, they’re having a hard time assessing what are U.S. policy goals and priorities,” he says.

When the U.S. Congress in 2000 agreed to grant China permanent normal trade relations—a year before the country became a member of the World Trade Organization—no one expected China to adopt America’s values. But there was a sense that Beijing was committed to a more market-oriented economy. While China is still too big a market to ignore, the shine has worn off, says Myron Brilliant, executive vice president and head of international affairs at the U.S. Chamber of Commerce. Just 33 percent of respondents in the U.S.-China Business Council’s 2018 member survey said they were optimistic about their companies’ prospects in China, compared with 58 percent in 2009.

Initial signs that China was implementing its WTO commitments during President George W. Bush’s first term—including lowering tariffs on thousands of products and revising national and local regulations to bring them into compliance with WTO rules—were followed by a setback when the global financial crisis hit in 2008. For many reformers in China, the crisis was proof that the U.S. economic model had failed. “I think under Xi Jinping the possibility of potential alignment has essentially disappeared,” says Scott Kennedy, a China expert at the Center for Strategic and International Studies. In response to the crisis, he says, the Chinese Communist Party doubled down on indigenous innovation, shutting out foreign companies and strengthening the People’s Liberation Army.

Senator Mark Warner, a Virginia Democrat on the Finance Committee, says that while he doesn’t agree with all aspects of the Trump team’s approach to trade—particularly imposing tariffs on imported metals, which has alienated allies—he gives the administration credit for making clear that relations with China cannot continue as they had. Under the Obama administration, Warner says, a sense of “American and Western arrogance” prevailed, while developing a strategy to counter China’s economic aggression should have been a higher priority.

Retired U.S. Air Force Brigadier General Robert Spalding, a former Defense Department official who most recently served on Trump’s National Security Council, remembers “a complete battle within the bureaucracy” during the previous administration over whether to take on China. Ultimately, the White House chose to prioritize a climate agreement and the denuclearization of North Korea, he says. In 2015, Spalding says, the Obama team discussed potential sanctions on Chinese telecommunications equipment maker ZTE Corp. but failed to take action. Last year, Trump imposed harsh penalties on ZTE and received praise from both political parties.

Today, those who’ve long worried about China’s policies are empowered to speak up. Former Treasury Secretary Hank Paulson, whom Warner described as a onetime China dove, “the epitome of ‘we’re going to rise together,’ ” this year gave a dim outlook on the chances for settling differences in the long term. “The trade debate in this city has changed markedly from just five years ago,” Paulson said in February at the Center for Strategic and International Studies in Washington. “In fact, politicians on both sides are actually applauding for tariffs—something, quite frankly, I never believed I’d see.”

Beijing has a reputation for waiting out U.S. administrations in the hope that the next person in the White House will take a more modest approach. This time, that strategy is unlikely to work. Analysts agree that the policy direction presumably would have shifted toward a tougher line even if Hillary Clinton had won the presidency in 2016, though likely with stylistic differences. “The paradigm on China needed to be broken,” says Ely Ratner, deputy national security adviser to former Vice President Joe Biden. “The new consensus is that the old strategy is not working. But there’s no consensus on what that means or what comes next.”

Kennedy says he often emphasizes to Chinese officials that Washington’s current stance will outlive the Trump administration. While some appreciate his input, he says, others in the Chinese government are more fatalistic. “This is just the standard American Cold War mindset that we will never satisfy,” he says, characterizing the response from these officials. “Xi Jinping is a hawk,” he adds, “and the lesson he draws is: Prepare for long-term hostility.”

To contact the editor responsible for this story: Jillian Goodman at jgoodman74@bloomberg.net

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